Burned by an alarming drop in its investment returns this year, Taiwan's largest pension manager decided on some major new steps to rectify the issue. A key one: dismiss disappointing fund partners and hire new ones to help raise its overseas asset exposure from 52% to 60% over the coming five years. 

And as part of this, it is keen to work with fund houses with strong artificial intelligence capabilities.

The Bureau of Labor Funds (BLF) reported that its investment return between January and September this year was NT$2.24 billion ($78.56 million), or a miniscule 0.05%. That was a major drop compared with the same period in 2019, when it posted an 8.68%, or a gain of NT$345.2 billion.As of September, BLF managed NT$4.45 trillion (($156 million) assets.

The pension fund manager’s monthly performance has gradually picked up since it suffered an 11.37% loss in March; it recorded a 1.46% gain in August. But Liu Li-ju, deputy director general of BLF, told AsianInvestor that outsourced asset managers have failed to ensure  satisfactory performance, given the market volatility. As a result, the asset owner is seeking to increase overseas allocation for a better long-term return.

As of October, BLF has 48% of its asset invested in domestic market and the rest (52%) into globe. The fund is gradually increasing its investments into overseas and targeting a 60% of total assets to be allocated outside Taiwan by 2025, Liu said, as it seeks to diversify its investment portfolio further to respond to uneven global economic growth and better capture reliable investment opportunities. 

Overall asset allocation
  Domestic  Overseas 
As of Oct 2020  48%  52% 
Target by 2025  40%  60% 

“We’ve seen hesitations and concerns from appointed asset managers since March and we are expecting to hire new asset managers for bringing diversified strategies into the fund, [to] bring a long-term return rate back to track.”  

“In the longer term (15 years), we are still aiming for an annualised return rate of 4%,” Liu added.

FIXED INCOME FAVOURED

Liu Li-ju, BLF

The pension fund has already begun this process. Last month (October 26), it invited bids for one infrastructure equity mandate and another multi-asset mandate for overseas investment, totalling $3.94 billion.

Liu said she is keen that the latter in particular take a fixed income focus.

“We would like to increase allocations into overseas, and fixed income will be one of the major focus since Taiwan domestic market provides limited selection in such assets,” she explained. “One of the reasons behind setting up the global multi-assets mandate is that we expect it [multi-assets mandate] will enable us more exposures [to overseas fixed income assets].” 

According to the announcement of the two mandates, BLF wants the proposed portfolio of the multi-asset mandate to potentially use a composite index that combines an equity benchmark index, a bond benchmark index and a benchmark index of other asset classes. Meanwhile, it aims to use one of two FTSE infrastructure indexes for its infrastructure mandate. 

The two newly announced bids could also help its plan for a deepen alternative exposure, as AsianInvestor reported in summer this year.

When it comes to domestic investments, the fund will stick with its environmental, social and governance emphasis, Liu added. BLF has just finished assigning a $2.3 billion corporate bond mandate focused on sustainable investing. On October 20 it appointed DWS Investment Americas, Insight Investment Management, JP Morgan Asset Management, Pimco and Western Asset Management.

WELCOME AI, BIG-DATA EXPERTS  

BLF’s desire to find smarter fund houses in new offshore asset areas also means it is looking to managers that are supported by smarter investment strategies – especially AI, said Liu. 

“For these two mandates, we also prefer to appoint asset managers who can leverage AI and big data better during investment process,” she added. 

The $1.64 billion global infrastructure securities mandate will be assigned between four managers, while the $2.3 billion global multi-assets one will be split equally by five managers. Fund houses will have to submit their applications on or before November 30. BLF is set to decide the eventual winners in the first quarter of 2021.

The focus on what looks to be a quantitative data approach makes sense; fundamental analysis is one of the cornerstones of portfolio management and it can be greatly enhanced by AI support, according to a research report published by CFA Institute in August. The report noted that such technologies can be applied across portfolio management, trading and risk management. 

A separate Deloitte report published last year stated that AI is a suite of technologies and capabilities that can help investment firms deliver new kinds of value and reshape their operating models.

For Liu certainly sees AI as less a gimmick and more a means of fund managers identifying pockets of investment opportunity. “Especially under [current market] uncertainties, investment should be supported by strong determination and patience,” she added, “AI and big-data implementation may provide us an unexpected way out.”